The United States Bankruptcy Court for the Eastern District of Michigan recently ruled in favor of a secured creditor’s Objection to Confirmation of the debtors’ Chapter 13 Plan in case 12-61616, Edward and Terry Kelley. The issue at stake regarded the treatment of Bank of America’s, the secured creditor, claim on a former rental property the debtors moved into as their primary residence approximately two months after filing for bankruptcy.
The debtors’ Chapter 13 Plan sought to continue to view the residence as an investment property and therefore modify the $38,000 mortgage financed by Bank of America to the current market value of the home which was $10,000. Bank of America objected to the confirmation of the plan believing that it violated 11 USC § 1322(b)(2) which states a plan may not modify a creditor’s claim secured by real property that is the debtor’s primary residence. In other words, the mortgage on the property could not be crammed down to the current market value and Bank of America should therefore be owed the full value of their claim.
The question the bankruptcy court faced was whether or not the property should be treated as a rental property or a primary residence. The Eastern District of Michigan ultimately ruled in favor of Bank of America stating, “this Court believes that the more important temporal consideration is not where debtors reside on the one day they file their petition (a date which may be subject to manipulation) but rather where debtors intend to reside during and after their bankruptcy.” Some facts the court considered while determining the property was in fact the debtors’ primary residence were: where the debtors resided on the date of their bankruptcy filing; whether or not the debtors moved out of their primary residence shortly before or after the bankruptcy filing; whether the debtors moved into a property formally used as a rental property; where the debtors intended to reside for the duration of their bankruptcy case; whether the debtors retained title to the property at the time they filed; and finally, whether the debtors began renting their principle residence to tenants around the time they filed for bankruptcy.
This question posed to the Michigan court was posed by Sasser Law Firm in a recent Chapter 11 case here in Raleigh, North Carolina. In that case, Sasser Law Firm took the position that the nature and use of the property at the time the loan originated (not the nature of the use when the bankruptcy case was filed) should govern whether or not a loan can be modified. The issue remains undecided in the Eastern District of North Carolina, but we are hopeful that a clarifying ruling will be made in the near future.